Progress Report Jouko Karvinen CEO of Medical Systems
Forward Looking Statements Forward Looking Statements This document contains certain forward-looking statements with respect to the financial condition, results of operations and business of Philips and certain of the plans and objectives of Philips with respect to these items (including, but not limited to, cost savings) in particular the outlook paragraph in this report. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forwardlooking statements. These factors include, but are not limited to, levels of consumer and business spending in major economies, changes in consumer tastes and preferences, changes in law, the performance of the financial markets, pension costs, the levels of marketing and promotional expenditures by Philips and its competitors, raw materials and employee costs, changes in exchange and interest rates (in particular, changes in the euro and the US dollar can materially affect results), changes in tax rates and future business combinations, acquisitions or dispositions and the rate of technological changes. Statements regarding market share, including as to Philips competitive position, contained in this document are based on outside sources such as specialized research institutes, industry and dealer panels in combination with management estimates. Where information is not yet available to Philips, those statements may also be based on estimates and projections prepared by outside sources or management. Rankings are based on sales unless otherwise stated. Use of non-gaap Information In presenting and discussing the Philips Group s financial position, operating results and cash flows, management uses certain non-gaap financial measures. These non-gaap financial measures should not be viewed in isolation as alternatives to the equivalent GAAP measure and should be used in conjunction with the most directly comparable US GAAP measure(s). A discussion of the non-gaap measures included in this document and a reconciliation of such measures to the most directly comparable US GAAP measure(s) are contained in this document.
Our Mission in Healthcare Sense & Simplicity We delight customers and consumers by improving their lives with advanced technology that is easy to experience and designed around them Philips Medical Systems provides products and services that allow our customers to intently focus on the patient throughout the entire care cycle
Agenda Market developments Performance update Where do we go from here Care Cycle
The Medical Systems & Device Market Main categories Medical equipment, services, devices and supplies $ 290 billion worldwide, 2005 Long term growth Imaging and monitoring 4-5% IT in Healthcare 7% Price erosion 2-3% 110B 75B 74 B 31B Surgical Instruments, Devices and Supplies IT in Healthcare Diagnostic Imaging and Monitoring Other Equipment & Services Sources: MedTech Insight, PMS internal analysis
Overall Market Share gain across geographies 2003-2005, world, equipment orders, quarterly MAT 23% 22% 21% 20% 19% Q1 2003 Q2 2003 Q3 2003 Q4 2003 Q1 2004 Q2 2004 Q3 2004 Q4 2004 Q1 2005 Q2 2005 Q3 2005 Q4 2005 Q1 2006 Source: various, Philips
Market Share Trends in more detail North America EMEA Asia Pacific MR CT X-Ray Ultrasound Nuclear Medicine Healthcare IT Cardiac & Monitoring 2003-2005 Q1 2006 Increasing No change Decreasing Q1 06 based on a comparison to Q1 05
Agenda Market developments Performance update Where do we go from here Care Cycle
Performance Update June 2005 we said Eleven consecutive quarters of margin improvement Will continue on this path beyond 14.4 % EBITA of 2004 significant & quantified opportunities still ahead Next step expansion is also a path growth opportunities mapped, discussions ongoing focus on improving care cycle, build on existing strengths and differentiate Value creation driven, not just top line our time table May 2006 we say Two years of market shares gains Return to margin improvements accelerate operational improvements accelerate low cost sourcing drive service penetration & scope Next step expansion is also a path acquired Stentor and Witt with clear growth synergies focus on improving care cycle, build on existing strengths, and differentiate Value creation driven, not just top line continues to be our agenda
Philips Medical Systems Imaging Systems EUR 2.4 bln Customer Services EUR 1.7 bln Information, Ultrasound and Monitoring Solutions EUR 2.3 bln Nuclear Medicine CT MR PET X-Ray Consultancy Clinical services Asset management Maintenance & Repair Healthcare Informatics Ultrasound & Monitoring Cardiac Systems Document services 2005 Revenues
Sales growth continues As do equipment orders Quarterly comparable sales growth % Quarterly currency comparable orders growth % 12 30 29 25 24 9 8 8 19 6 4 3 5 4 5 6 7 20 15 10 16 9 12 18 3 6 5 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2004 2005 2006 0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2004 2005 2006 Full Year comparable sales growth % Full Year currency comparable orders growth % 8 7 7 15 12 14 13 6 4 9 4 6 2 3 0 0 2003 2004 2005 0 2003 2004 2005
EBIT (in millions of euros) Quarterly as reported Quarterly adjusted 400 17.6% 20% 350 300 200 100 0-100 -200-300 -400 13.1% 9.2% 11.6% 10.5% 10.1% 7.3% 7.8% 6.7% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2004 2005 2006-19.8% 20% 15% 10% 5% 0% -5% -10% -15% -20% 300 250 200 150 100 50 0 12.2% 11.5% 12.2% 10.6% 7.2% 8.6% 7.8% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2004 2005 2006 15% 10% 5% Full Year as reported Full Year adjusted 760 660 560 460 360 260 160 60 5.8% 7.2% 0.6% 10.7% 15% 13% 11% 9% 7% 5% 3% 900 800 700 600 500 400 300 200 100 10.2% 13.5% 13.1% 15% 14% 13% 12% 11% 10% 9% -40 2002 2003 2004 2005 1% 0 2002 2003 2004 2005 8% Quarterly adjustments: Excludes MedQuist, Volumetrics settlement Q4 04 EUR 133 m, Stentor impact 2005: Q3 EUR 11 m, Q4 EUR 10 m, 2006: purch. acc. Q1 EUR 3 m. Full year adjustments: Excludes MedQuist, 2003 special items (See annual report), 2004 Volumetrics settlement EUR 133 m, 2005 Stentor impact EUR 21 m.
A Faster, More Efficient Supply Chain Equipment Direct Deliveries as % Sales (world) Equipment Direct Deliveries as % Sales (world) 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 26% 32% 73% 79% 80% 2002 2003 2004 2005 Target Net Capital Turnover Net Capital Turnover 6 5 4.0 4 3.8 3.7 5.0 IT spending IT as spending % of salesas % Sales 8% 3 2.9 6% 4% 4.9% 4.0% 3.8% 3.0% 2 2% 1 0% 2003 2004 2005 Target 0 2002 2003 2004 2005 Target Net Capital = Capital excluding Goodwill
Accelerate Innovation & Integrate Supply Base No. of Suppliers (80 % of BOM spend) Increase of Research FTE (indexed) 250 222 230 200 150 100 150 135 110 100 200 150 100 100 140 166 50 50 0 2003 2004 2005 Target 0 2002 2003 2004 2005 Target Supplier Owned Inventory (%) New Product Shipments 70% 58% 63% 70 60 50 40 30 20 10 0 60 49 39 12 2003 2004 2005 Target 40% 45% 2002 2003 2004 2005 Target
Margin expansion In addition to continued improvements in supply management, supply chain and IT, high innovation rate etc. we will Opportunity Emerging Market Growth Product Service Mix Channel Productivity Action Accelerate Philips Neusoft JV Add local for local acquisitions Continue to Drive Contract Penetration Service Scope Increase Single Global Sales and Service Organization Optimize Direct/Indirect Channel Split Imaging optimization Industrial and functional simplification Low Cost Sourcing Accelerate Sourcing from Low Cost Areas
Philips Neusoft JV GXR Essenta (20% cost improvement) Product Training in China Product Launch in China Product Training in Asia Jan 2006 Feb 2006 Mar 2006 Product Launch in Asia June 2006
Service growth driven by contract penetration indexed 122 130% Equipment & Services sales growth (currency adjusted) Medical Systems Total Equipment Services 120% 107 110% 520 100 100% 90% 80% Contract Penetration end 2003 Contract Penetration end 2004 Contract Penetration end 2005 70% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2003 2004 2005 2006 Strong year on year improvement in contract penetration rate
Emergency Ultrasound in Pre-Hospital Markets Emergency Ultrasound on Next Generation Advanced Life Support brings better remote care and transports key data to hospital ALS and Ultrasound Imaging on-site
PMS Sourcing from low-cost Countries is Increasing. 450 400 350 300 250 200 150 100 50 0 16.46 22.40 8.57 10.77 Total (LCC) Asia-Less China 4.00 4.64 Eastern Europe 2.46 3.11 2.34 1.49 1.42 0.06 Mexico China Other 25.00 20.00 15.00 10.00 5.00 0.00 % of total BOM 2005 2006 Target %2005 % target 2006
Agenda Market developments Performance update Where do we go from here Care Cycle
Meet Gerard Donovan. Cardiology $3,943 Radiology $1,290 Billing Plant Administration Pharmacy $1,433 Food services Lab $3,233 About that Bill Intensive Care $17,664 Operating Room $36,127... and his 150 medical staff...
Medical technology continues to transform Healthcare Imaging and Monitoring earlier diagnosis saves lives and reduces costs Minimally invasive procedures reducing patient trauma and costs Healthcare IT Right Information at the right time enables better treatment and lower costs Molecular Medicine Preventing disease from happening Around 70% of the survival improvement in heart attack mortality is a result of changes in technology. Cutler & McClellan, 2001 Sources: Russ Coile, Futurescan 2003, SG-2
Innovation drives profitable growth New Philips GEMINI TF with TruFlight PET technology True benefits of time of flight technology 20% better spatial and contrast resolution Detects previously obscured tumors Almost doubles patient throughput Creates a new benchmark in consistent image quality for large patients Boosts the sensitivity demanded by low count-rate MI applications (e.g. dynamic studies and more specific PET agents) The new standard in speed, comfort, clarity and flexibility
Minimally Invasive procedures have taken the lead in treating obstructed heart arteries USA Procedures in Thousands 800 700 600 500 400 300 200 100 Interventional cardiac Procedures stents, balloons Open Heart Bypass 0 1991 1995 2000 2003 Source: American Heart Association, Statistical update, 2006
Expanding in Healthcare IT Full Enterprise IT portfolio Intgris Allura Xcelera ABC - A Imaging Modalities & Monitoring Clinical Specialty Solutions Enterprise Solutions Guaranteeing a consistent Experience
Agenda Market developments Performance update Where do we go from here Care Cycle
Focus on the Care Cycle space to grow $ 180 billion market Operating room Monitoring Imaging Information & Decision support Treatment Intensive Care unit Monitoring Diagnostics Imaging Diagnostics Step down facility Monitoring $ 90 billion market $ 10 billion market Pre-Hospital/ Ambulance Monitoring Follow Up Home Monitoring
Philips Schering Alliance Goal To jointly research, develop and commercialize a new technology Optical Imaging Initial focus To develop optical mammography for diagnosing breast cancer 1 st development project Combines Schering s omocinian (SF-64) optical agent with a Philips optical scanner Business model Partners will share equally all investments plus all revenue in the alliance Alliance management A dedicated alliance management team in place
Molecular Diagnostics Improvements across Care Cycles Therapy Monitoring Patient Stratification for Personalized Treatment Monitoring for Relapse Early Diagnosis Rapid Results Management of Chronic Disease Predisposition Testing & Screening
Priorities Maximize Value Creation Expand the business Strengthen current portfolio Grow with Improving Margins Secure previous investments
Do it right is more important than do it now Acquisition Approach Growth opportunities No or time-limited margin dilution Quality of Management Clear commercial, clinical, and technology synergies Complementary position Strong market position Integration strategy part of acquisition decision Walk-away price set at discussion start A good alliance is an alternative to acquisition Value Creation
Conclusions In the past four years we have built a strong team built a track record of improvement built a track record of innovation For the coming few years we have many quantified improvement opportunities a few additional margin points to gain a clear set of priorities for further expansion